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An Inevitable Clash

Corporate governance is a pretty dry subject in the best of times, but it just may become a bit more interesting, particularly if we have gotten it wrong and it turns out to be the source of the current worldwide economic crisis.

The Occupy Wall Street protests clearly show the people's frustration with high unemployment and corporate greed. People are rising up to express dissatisfaction with the status quo and the government's ineffectiveness in addressing it. Protests like these are what's great about America, yet these protesters can only define the desired end state (jobs and security), not the means of achieving it. This economic crisis is stuck between tax cuts and a bailout, and no systemic changes have been proposed that can fundamentally address the underlying issues.

The book Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL by Roger L. Martin is a worthwhile read with some surprising insights about what's wrong with our companies and the economy. It is convincing and provides a view on necessary governance and systemic changes. I am not sure where the political will for his kind of change will come from, unless perhaps the protesters align with Martin's remedies. Now that would create the political will for real change.

Martin attacks the belief that the role of a corporate board is to maximize shareholder value, and he cites persuasive evidence and arguments to support his alternative. As examples, he uses companies like Apple, P&G, and J&J, which put customers first, ahead of shareholders, yet consistently deliver the best shareholder rewards. He also uses comparisons to the National Football League to show the structural problems we have in our companies and the economy. Compensation philosophy, short-term trading, and the ranking of shareholders among stakeholders are all in his sights.

He describes the “real world,” which is the world of customers, employees, and value creation, along with the “expectations world,” made up of the stock market and hedge funds. He shows how the intermingling of the two worlds, along with the “maximizing shareholder value” mantra, is the core problem. He illustrates this effectively with an NFL comparison: Giving CEOs stock-based compensation is the same as letting NFL players bet on the outcome of their games. If that occurred in the NFL, it wouldn't be long before professional football found itself in the same kind of mess as our companies.

Mixing the “real world” with the “expectation world” leads to volatility and corruption. Professor Martin offers a solution which is one of the best I have seen, and it needs to be thoroughly explored.

Supply chain professionals are clearly centered in the real world and know that putting customers first and creating real value is the right thing to do. Why don't we align our companies and economy to this? Why don't we penalize (through taxation, regulation, or both) speculation that destroys real world value creation? After reading Dr. Martin's book, it seems obvious to me.

7 comments on “An Inevitable Clash

  1. FLYINGSCOT
    October 13, 2011

    Thank you for this entertaining post.  I am a firm believer in the real world and wish that companies would spend more of their time attending to it rather that pursuing the quarter by quarter folly of maximizing shareholder value.  

  2. Daniel
    October 14, 2011

    Ken, when majority of the wealth or money is getting concentrating to some particular category of peoples, others can get frustrated.  We know most of the corporate are handling majority of the wealth, where somebody’s profit or asset is more than nation’s wealth or per year income. In such cases instead of doing something for the public, such companies are trying to get more benefit from the government to increase their profit. This can be surly a frustrating reason for common peoples and those who are below poverty line.

  3. JADEN
    October 14, 2011

    A great insight in this post is about delighting the customers; customers come first and shareholders last.

  4. Barbara Jorgensen
    October 14, 2011

    Ken–great blog! I tried to discuss sports and business in a previous blog (How many do-overs…) with minimal success. The point about the NFL is perfect–professional sports in general clearly does not care about customers, otherwise ticket prices would not be so high. They are high because players demand insane salaries, because the “market will bear it…” I hope professional sports sees the equivalent of Occupy Wall Street, where fans just refuse to pay ticket prices and force a sea change.

    I can't say I'm optimistic, though, season tickets for Boston sports continue to be something you get only if a ticket-holder passes on

  5. stochastic excursion
    October 14, 2011

    There is a notion that seems to be shared by progressives and staunch capitalists alike that I have a problem with.  It's said from time to time that corporations are mandated to return value to the shareholder regardless of what may or may not be legal (this is one of the main points in the documentary, “The Corporation” that came out some years ago). 

    Virtually all states where articles of incorporation are drawn up require the officers incorporating the business to state its purpose.  Invariably, the purpose is stated as “To comply with the laws of such and such a jurisdiction.”

    This practice is standard and seems curious to me.  However I just attribute it as being just one more layer in the legal boilerplate.  In any case it seems to refute the ideas that the law ends at the receptionists desk.

  6. Ken Bradley
    October 15, 2011

    Barbara,

    Thanks for the complement on my last blog and your take on professional sports. I have a different view on the NFL which I will share as it relates to materials costs in the supply chain.

    I think players’ salaries impact profits but not ticket prices. As long as the NFL can fill stadiums, the prices will be high. What’s good about the NFL is that they can fill their seats and attract television viewers better than any other sport. They can do this because they create value for their customers. They constantly study the game and change the rules of play so that the offence and defence remains in balance thereby maintaining customer interest and game excitement. Their actions are all real world driven with the customer first. Changing the rules is regulation for the good.

    Players’ salaries are high, probably at a level that is undeserved, but the NFL pays these salaries in cash. Their cash is a product of real world value creation unlike CEO stock compensation of the corporate expectations world. The NFL players are not incented to cheat or manipulate outcomes as their motivation and behaviour is aligned with the customer; they are motivated to win the game not effect the points spread.

    I too believe professional athletes are overpaid and would like to see lower ticket prices so that average families with kids could go to more games; but I do not equate ticket price with cost. You are right when you say price is determined by the market and, at Freebenchmarking.com, we see a wide range in market prices as different companies buy the exact same electronic components at widely varying prices sometimes different by many times. The cost of making the components purchased by customers isn’t different but the price sure is. Some companies manage the market price while others live with it.

    This being said, I don’t know how to bring down the cost of professional sports tickets! Wish I did.

  7. Himanshugupta
    October 27, 2011

    Ken, i liked your post and the commentary on Barbara's post. I was thinking about the high salaries of stars in both corporate and sport world. Its not just simple supply-demand. It seems to go in opposite direction from my experience, the more the star players in the game the higher the price or stake. In India, cricket is widely popular (just as NFL) and with the increasing number of games player per years and hence more star players emerging; the money that cricketers get is only increasing. The same goes in the corporate world. Companies always need more and more star players to increase the stake of the game. 

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